The Hindu : Business : Autonomy for public sector banks remains illusory

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Monday, Feb 28, 2005

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Business

Autonomy for public sector banks remains illusory

Will today's budget say anything original about public sector banks' autonomy?

THERE HAVE been exaggerated expectations from the so-called autonomy package for the public sector banks announced on February 22. To some extent the news even overshadowed the pre-budget hype. Even the stock markets seemed to have welcomed the autonomy measures, at least initially. Bank stocks moved up on the day the autonomy proposals became public but lost their initial gains the next day.

Stock market reactions to such official announcements have, as a rule, limited value in assessing their impact. However, the recent market fascination for bank stocks is far from waning. A variety of expectations from policy makers — an environment favouring mergers and acquisitions on a grand scale and greater role for foreign direct investment, to name two principal items in the market's wish list — has kept the interest in bank stocks alive. In the run up to the budget the expectations were only heightened.

The Economic Survey presented on February 25 calls for greater competition and efficiency in banking to bring spreads down, reduce non-performing assets and improve the credit culture and better credit appraisal skills to identify future winners among start ups and small scale units. Although not stated explicitly, the Survey has in mind (and probably expects the Union Budget to make bolder statements on this) the so-called second-generation financial sector reforms, which are of course more difficult to implement than the reform measures implemented so far.

Quite independent of the budget, an autonomy package for the public sector banks has been on the cards for a long time. Since the PSBs continue to dominate the banking landscape, a real autonomy package for them tantamounts to a major reform measure. Autonomy here ought to mean genuine freedom from their dominant owners, the Government, to operate on a commercial basis. Almost all PSBs have listed their shares and a few including Punjab National Bank are now in the market to raise fresh resources. The interests of the non -government shareholders will have to be reckoned with, not just those of the Government.

Good intentions

Incidentally, for a long time to come, the PSBs are expected to be in the Government fold. Autonomy for the banks therefore means less oversight by the Government. If one goes by announcements there has never been any paucity of good intentions. In fact, some of the earlier measures contemplated went far beyond what is talked about now. Yashwant Sinha in his budget five years ago wanted to bring down the Government stake in PSBs to 33 per cent (though he maintained that their government character would be maintained). That kind of reform is impossible to contemplate in today's circumstances but the point is that the Government had at some point gone so far as to contemplate an overhaul of the ownership structure.

From that standpoint no new autonomy measures can be breathtakingly original. The present one falls far short of even the limited expectations of bankers. The crux of the problem is that under government ownership, accountability issues and fixing blame when something goes wrong are very different from those in the private sector. A decision going wrong in a public sector bank can have catastrophic consequences for the officials, sometimes long after they have retired. The fear to lend, invest or otherwise function on a commercial basis is very real. Finance Ministers like Mr. Sinha, Jaswant Singh and P. Chidambram have been aware of the problem which one of them had called the tyranny of the three Cs — the Central Vigilance Commission, the Central Bureau of Investigation and the Comptroller and Auditor General.

The fear psychosis is real although substantial modifications have been made in vigilance procedures for instance by an enlightened body now constituting the CVC. It is also likely that some inefficiencies may pass off as fear induced inhibitions. But the fact that only PSBs continue to be subject to bodies such as these and to laws such as the Prevention of Corruption Act while private banks have no such handicaps, shows there is no level playing field.

Unrealistic package

The latest package, therefore, is disappointing as it fails to address this aspect. Also, many of the measures announced in the package dealing with human resources issues and branch network rationalisation are theoretical and unlikely to have any practical value. Is it possible at all to close down a rural branch without the support of the government and the local administration?

Will the board of a government bank decide on taking over another bank on their own without consulting the government just because the new package says so? And talking of freedom to fix compensation packages, how many banks will be comfortable in bypassing the bipartite settlements (with their unions)?

Another indication that nothing is going to change: many PSB chairmen rushed to the press with lavish praise for the package. The Government will probably never get a proper feedback from the top management of PSBs, least of all in areas of autonomy.

C. R. L. Narasimhan

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